IRS Issues Guidance on Carried Interest for S Corporations

The IRS recently issued Notice 2018-18, “Guidance Under Section 1061, Partnership Interests Held in Connection with Performance of Services,” that makes S Corporations subject to the extended three-year holding period for applicable partnership interests.

Regulations will be issued soon and will clarify that taxpayers will not be able to circumvent the three-year rule by using S Corporations, the IRS states.

Carried interests are ownership interests in a partnership that share in the partnership’s net profits. Carried interests often are issued to investment managers in connection with their services. Rather than receiving ordinary income, the holder often receives capital gains that are taxed at a lower rate.

The Tax Cuts and Jobs Act extended the holding period for certain carried interests (i.e. applicable partnership interests) to more than three years from more than one year. Under the new law, the three-year rule became effective for tax years beginning after Dec. 31, 2017. The IRS and Treasury intend to issue regulations implementing Section 3 of the notice that also are effective for tax years beginning after that date.

Contact information regarding the notice is listed at the bottom of the link.

About Terry Sheridan

Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.